Book Description

This dissertation, "Financial Contagion and Herding Behavior: Evidence From the Stock and Indirect Real Estate Markets" by Jing, Xue, 薛晶, was obtained from The University of Hong Kong (Pokfulam, Hong Kong) and is being sold pursuant to Creative Commons: Attribution 3.0 Hong Kong License. The content of this dissertation has not been altered in any way. We have altered the formatting in order to facilitate the ease of printing and reading of the dissertation. All rights not granted by the above license are retained by the author. Abstract: Financial contagion, in this study, refers to spreading of crisis across markets in different locations. The observable consequence is usually in the form of increase in co-movement of asset prices in two markets after a crisis event. The causes of financial contagion have been studied for over twenty years, however, up till now, results have been mixed. One unsettled issue is whether market fundamentals alone can explain financial contagion. Pure fundamental based explanation suggests that the financial, economic and trade linkages are solely responsible for the transmission of crisis across markets. On the other hand, the behavioral finance researchers propose that herding behavior also plays an important role in explaining financial contagion. This issue cannot be easily resolved since it is difficult to empirically distinguish linkage effect and herding behavior. This thesis contributes to this unresolved issue by examining financial contagion in the stock market and indirect real estate market. In the stock market, both fundamental linkages and herding are likely to exist. However some securities are less prone to herding than others. Herding across international markets is likely to be less serious when there is less information asymmetry between investors and management. In addition, compared with foreign investors, local investors are more confident in the link between market fundamentals and the corresponding securities. Real Estate Investment Trusts (REITs) are likely to suffer from less information asymmetry problem since the REITs market has more stringent regulatory requirements for information disclosure. Furthermore, the pricing of real estate asset, the main type of assets held by the REITs, often requires local knowledge. Local investors investing in REITs are less likely to mimic the investor behavior in another overseas REITs market. Listed property companies also share some similarities with REITs, although they are less immune to herding compared with REITs as information disclosure is less stringent for listed property companies. Since the asset prices of real estate are affected by the economic performance, fundamental linkages amongst all indirect real estate still likely to exist and are similar to other types of listed companies. If market fundamental is the only source of financial contagion (i.e. no herding), financial contagion in the global stock and indirect real estate markets should be similar. This thesis uses the 2008 global financial crisis (GFC) as the crisis event to examine financial contagion across the world's major equity markets. Our empirical results show that financial contagion is stronger in the entire stock markets than in the indirect real estate markets and that financial contagion is the weakest in the REITs markets, which support the herding behavior hypothesis and reject the pure fundamental explanation. This reasoning does not require indirect real estate to be totally immune from herding. All that is needed is that indirect real estate is less prone to herding compared with the common stocks. Herding behavior can be rational or irrational. The latter refers to revision of asset prices by following the pricing behavior of other markets irrespective of market fundamentals. Our empirical evidence cannot reject irrational herding behavior in the indirect real estate market since contagion effect becomes stronger wh